UNPACKING THE FIRST HOME LOAN DEPOSIT SCHEME (FHLDS)
The 2019 federal election is over, and the results have seen the Coalition government re-elected.
Whilst many of their proposed measures in the 2019-20 and 2018-19 Federal Budgets (that haven’t yet been legislated) were reiterated as election promises, some new proposed measures were also announced.
The establishment of the First Home Loan Deposit Scheme (FHLDS) is one of them.
The First Home Loan Deposit Scheme (FHLDS)
The FHLDS aims to help first home buyers purchase a home faster. Estimates suggest that it will reduce the time taken for first home buyers to save for a home deposit, by at least half.
For context, the national averages* for the time it takes an average-income couple to save a 20% home deposit, is 4.6 years for a median-priced house; or 4.2 years for a median-priced apartment.
If legislated, the FHLDS will help eligible first home buyers purchase a home with a deposit as low as 5%, by guaranteeing any shortfall in the 20% deposit that most lending institutions require for a home loan.
This means that eligible first home buyers will also avoid Lender’s Mortgage Insurance, which on average can be around $10,000 (this can vary depending upon the loan to value ratio and the amount borrowed).
Below are some of the preliminary details that have been released regarding the FHLDS:
the FHLDS will commence on 1 January 2020 and operate under the National Housing Finance and Investment Corporation (NHFIC);
the NHFIC will partner with private lenders to deliver the FHLDS, prioritising smaller lenders to boost competition;
the FHLDS will support up to 10,000 eligible first home buyer loans each year;
the FHLDS will be available to eligible first home buyers, i.e. those that have:
saved a home deposit of at least 5% up to 20%,
income <$125,000 (single) or <$200,000 (couple combined, where both are first home buyers), based on their previous financial year’s taxable income;
the FHLDS will target entry properties, with a maximum loan size determined on a regional basis;
the FHLDS (the guarantee) will cease where borrowers refinance or their home loan ends;
the FHLDS will be able to be used in conjunction with the First Home Super Saver Scheme, as well as relevant State/Territory first home buyer grants and stamp duty concessions.
Please note: Lending institutions will still undertake their usual credit check processes (serviceability assessments) to ensure that borrowers are in a position to be able to afford the home loan repayments.
Lastly, it’s important to understand that the FHLDS is still only a proposed measure, and legislation needs to be passed to make it effective; also, changes could be made to it, or it may be rejected.
Possible mortgage lending revisions on the horizon
The Australian Prudential Regulation Authority (APRA) has advised that they are considering possible revisions to their guidance on the serviceability assessments. Specifically, those that authorised deposit-taking institutions (ADIs) perform on residential mortgage loan applications.
Currently, APRA expects ADIs to assess loan serviceability using the higher of either:
an interest rate floor of at least 7%, or
a 2% buffer over the loan’s interest rate.
In addition, APRA’s guidance also indicates that a prudent ADI should use interest rates comfortably above these minimums (most ADIs use 7.25% and 2.25% interest rates, respectively).
With the above in mind, APRA is considering the following possible revisions:
removing its guidance that ADIs should assess whether borrowers can afford their repayment obligations using a minimum interest rate of at least 7%,
ADIs’ serviceability assessments incorporate an interest rate buffer of 2.5%, and
removing the expectation that a prudent ADI should use an interest rate comfortably above the proposed 2.5% buffer.
Moving forward
Entering the housing market can be difficult, especially when considering the national averages for the time it takes an average-income couple to save a 20% deposit on a median-priced house or apartment.
If legislated, the FHLDS may be of benefit in this respect. However, it’s important not just to consider the short-term gain that it intends to offer for eligible first home buyers.
For example, assuming a 5.5% interest rate, weekly repayment frequency and 30-year home loan term, the long-term implications of buying a $571,000 residential property with differing home deposits are as follows:
In this simple example, when compared to a 20% home deposit, a 5% home deposit could end up costing an extra $89,301 in interest over the life of a 30-year home loan. Also, there is the consideration with regard to the difference between the loan repayment amounts.
After reading this article, you may also find the following of interest:
first home buyer grants and stamp duty concessions
If you have any questions regarding this article, please do not hesitate to contact us.
*Bankwest. (2017). Bankwest First Time Buyer Report.